Asian construction growth to

(Source: Umar Mukhtar @ Pexels via futurecio.tech)

ASIAN CONSTRUCTION GROWTH TO SUFFER DRASTIC

Growth of the Asian construction sector is expected to slow drastically in 2020, chiefly due to the COVID-19 pandemic. Throughout the first half of the year, outbreaks in major construction markets across Asia such as China, Indonesia, India and the Philippines have prompted a number of downward revisions to impending SLOWDOWN IN 2020 growth forecasts, and as a consequence, growth of the region as a whole is expected to slow down as well.

Relative to other regions across the world, Asia continues to be the fastest growing construction market in 2020. Real growth for the Asian construction sector is now expected to remain flat at 0.2% y-o-y in 2020, compared to the initial forecast of 5.3% y-o-y back in January. The near-term slump could potentially be followed by a strong pickup in construction activity in the infrastructure sector, especially as pro-infrastructure policies aimed at rejuvenating economic activity are being pursued by some governments in the regions, taking advantage of today’s low interest rate environment. A time lag associated with project implementation will mean that this year’s growth is unlikely to be rescued by these policies, but medium (Source: archdaily)

(Source: concrete-asia.com)

to long-term prospects remain robust.

A large part of Asia’s growth will be contributed by the resilient Chinese construction sector, which contributes to more than half of the total value of the Asian construction sector. China’s construction sector is expected to outperform its most of its regional peers and grow by 1.8% y-o-y in real terms. This is despite a dismal performance in 1Q 2020, where the sector shrunk by 17.5%. y-o-y, mainly a result of lockdowns imposed by the local governments in the most affected regions of Hubei, Zhejiang, Guangdong and Beijing. Restrictions were gradually eased towards the end of 1Q 2020, allowing most construction work to resume albeit with safety measures to prevent the spread of COVID-19. Also, the Chinese government stated its intention to accelerate infrastructure projects to spur growth of the construction sector, and the wider economy. This is backed by a record issuance of CNY1.03 trillion worth of local government special bonds in May 2020, to finance various transport and ICT infrastructure projects across the country. Growth of the construction sector has rebounded strongly in 2Q 2020 at 7.8% y-o-y in real terms, and an even stronger performance is anticipated in the second half of the year driven by government spending.

Besides China, Vietnam is expected to be an outperformer in Asia as well, mainly helped by its successful Covid-19 containment strategy. While all construction markets in Asia are expected to suffer a fall in growth rate this year, the degree of slowdown in Vietnam’s construction market will be one of the smallest. Vietnam’s construction sector is currently forecast to grow by 5.7% y-o-y, down 1.5 percentage points from initial forecast of 7.2% y-o-y, which places Vietnam as the fastest growing construction market within South-East Asia in 2020, outperforming regional peers the Philippines, Indonesia and Thailand.

Key projects currently in progress include segments of the North-South Expressway and Line 1 of the Ho Chi Minh City Metro, as well as buildings such as the Spirit of Saigon Tower and Lotte Group’s Eco Smart City Project, both located in Ho Chi Minh City. The recent passage of the new Public-Private Partnership (PPP) Law, though beneficial to growth of Vietnam’s infrastructure sector in the long-term, is not expected to lead to a material boost in construction activity in 2020, as proposed PPP projects will still have to undergo feasibility studies, tendering and bidding before construction.

Laggards in the Asia region include Singapore, Malaysia, India and Australia, all whom have been hit hard by lockdowns to the extent that a recovery in 3Q 2020 and 4Q 2020 is unlikely to salvage the drastic slowdown in the first half of the year. In Singapore, the outbreak of COVID-19 in dormitories housing foreign migrant construction workers has led to a severe manpower crunch in 2Q 2020, a situation compounded by the government’s decision to impose a partial lockdown which restricted construction activity. These collective factors led to a collapse of the Singaporean construction industry in 2Q 2020, where advanced estimates point to a growth rate of -54.7% y-o-y. Singapore is expected to post the sharpest decline in growth, with a forecast standing at -10.8% y-o-y in 2020.

Likewise in Malaysia, lockdown measures in 2Q 2020 had restricted the movement of goods and labour, and certain construction works were halted. Demand for housing is expected to take a severe hit, given the persistent property overhang situation in Malaysia that have worsened over the past four years, as well as falling income levels due to economic difficulties across the board. Malaysia’s construction sector growth is expected to hit -5.2% y-o-y in 2020.

(Source: gtreview.com)

(Source: businesstimes.com.sg)

(Source: globalconstructionreview.com)

Meanwhile in India, the number of COVID-19 cases increased sharply in May and June 2020, despite the government imposing a nationwide lockdown in April. At the point of writing, the number of confirmed positive cases is third globally, behind the United States and Brazil. Given the population density of Indian cities and the poor living conditions in certain areas, India is at risk of a prolonged COVID-19 outbreak that would have a substantial impact on its economy. The most direct impact of this would be on its buildings sector, where demand for housing is expected to fall, and businesses to hold back their capital expenditure plans in light of economic uncertainty. Also, government spending on infrastructure will be limited this fiscal year as funds will likely be reallocated to support struggling industries. The aforementioned phenomenon is not unique to India – the governments of Indonesia and the Philippines have also been forced to temporarily decrease spending on infrastructure to address other pressing issues. India’s construction sector is expected to shrink by 3.0% y-o-y in FY2020/21, which runs from April 2020 to March 2021.

In Australia, the construction sector had been hit by the both the bushfire crisis in January 2020, and the outbreak of COVID-19 from February onwards. Even though initial efforts to curb the transmission of COVID-19 have been relatively successful, there has been a re-emergence of new clusters in the state of Victoria, which prompted the state government to reimpose lockdown restrictions in July 2020. Again, the slump in construction activity is expected to be led by the buildings sector. According to data provided by the Australian Bureau of Statistics, the total number of dwelling units approved for construction fell by 11.6% y-o-y in May 2020. A further breakdown is as follows: the value of residential building fell 17.3%, while the value of non-residential buildings fell 7.1%. Australia’s infrastructure sector on the other hand, will act as a cushion to growth slowdown, driven by government spending on reconstruction efforts on infrastructure damaged by the bushfire crisis, as well as its commitment to advance projects included in its 10-Year Infrastructure Investment Program. Australia’s construction sector is expected to shrink by 4.0% y-o-y in 2020.

Risks to these forecasts are weighed decisively towards the downside, given uncertainty over the length of the coronavirus pandemic and its potential to cause further disruptions to construction activity. Fresh outbreaks in Hong Kong, South Korea and Australia showed that markets are always at risk of outbreaks even if they have achieved prior success in the clampdown of virus transmission. Based on Fitch Solution’s internal proprietary data, as well as datapoints provided by the World Health Organisation, the construction sector in countries such as Sri Lanka, Malaysia and Vietnam would be hit hardest in the event of a second outbreak due to a combination of poorer medical infrastructure and poorer fiscal position.

Another major downside risk to this forecast is the reduction in foreign direct investments across all Asian economies in 2020. With COVID-19 pandemic severely affecting the economic prospects of most countries, investment outflows into foreign infrastructure markets could be dampened. Markets that are more reliant on FDI include Vietnam, Indonesia, the Philippines and Bangladesh, and a slowdown in FDI inflows could further reduce financing available for the both buildings and infrastructure projects.

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